When you look at your government bond holdings today, the big question is:
“Do I stay in very short-term gilts, or buy some longer-term gilts, to increase my return?”
In this article we look at current yield-to-maturity (YTM) data and think about both return and tax.
1. What the current UK gilt curve is telling you
Right now the Bank of England base rate is 4%.
But the gilt market has already moved ahead of that. If you look at:
- The UK gilt table Source: dividenddata.co.uk
- And simple benchmark yields for 1, 2, 5 and 10 years
you see something like this (11 December 2025):
| Maturity band | Example gilts (DividendData) | YTM (approx) |
|---|---|---|
| Early 2026 | T26 (0.125% 30-Jan-26) | 3.2% |
| Mid–late 2026 | TG26 (1.5% 22-Jul-26), T26A (0.375% 22-Oct-26) | 3.4–3.7% |
| 2027–2028 | T27A / TS27 / TG27 / TN28 / TE28 | 3.5–3.8% |
| 2029–2031 | TG29, T30, TG30, T31H, T31 | 3.8–4.1% |
| 2032–2033 | TG32, TR32, TR33, TG33 | ~4.1–4.3% |
| Long (2040s–2050s) | T40, T42, TR43, T54 etc. | ~5.0–5.2% |
(Data from DividendData “UK Gilt Prices and Yields”, last updated 11 Dec 2025)
So the curve today is gently upward-sloping (this means rates are increasing if you have a Government Bond for a longer term.)
- Very short-dated (2026) ≈ 3.2–3.7%
- Medium (2030–2032) ≈ 4.0–4.1%
- Very long (2050+) ≈ 5.1–5.2%
In other words, you’re currently being paid a bit more to take term or duration risk.
2. Why the yield to maturity (YTM) is the number to watch
DividendData helpfully shows both:
- Running yield – income / price (tells you the cash coupon you’ll see each year), and
- Yield to maturity (YTM) – the true annualised return if you hold to maturity, including capital gain/loss back to £100.
Many tax-aware investors have purchased into low-coupon, short-dated gilts at a discount (for example T26), where:
- The coupon is tiny (and taxed as interest), but
- The capital uplift back to par is tax-free because most gilts are exempt from CGT.
So if you hold, say, T26 to maturity, your return is mostly a capital gain with no CGT, and only a sliver of taxed interest – a neat trick if you’ve used your Personal Savings Allowance.
The key point: YTM include everything and works out your return. So when you compare T26 with, say, TG30 or TG32, you’re comparing like with like in return terms.
3. For very short-term holders: What happens if you extend?
Let’s imagine you hold a bundle of 2026 gilts today – maybe T26, TG26, T26A.
3.1 The “do nothing” path
If you just let them mature:
- You receive £100 back per £100 nominal on, say, 30 Jan 2026 for T26.
- You’ve earned roughly 3.2–3.7% annualised over the hold period, based on your purchase price.
- Then you face a reinvestment decision in 2026, when:
- Base rates may be lower (markets are already expecting cuts).
- Short-dated gilts and savings accounts might yield less than they do now.
This is the reinvestment risk of parking everything at the very front of the curve.
3.2 Stepping out to 2030–2032: modestly higher Yield to Maturity
If instead you roll some money into low-coupon gilts a bit further out, for example:
- TG30 (0.375% 2030) – YTM ≈ 3.9%
- TG31 (0.25% 2031) – YTM ≈ 4.0%
- TG32 (1.0% 2032) – YTM ≈ 4.1%
You:
- Increase expected return vs staying in 2026 gilts (roughly +0.3–0.8% per year on current numbers).
- Lock in that rate for longer, reducing your reinvestment risk.
- Still keep coupons low, so most of the return is a CGT-free capital uplift as the bond drifts up towards £100.
Of course, there’s a trade-off:
- Price risk rises – a 2032 gilt will move more if yields jump than a 2026 gilt.
- You’re committing your money for longer – though in practice gilts are liquid and can be sold if you change your mind (at a profit or loss).
4. Strategy ideas to increase return by extending maturities
This is general education, not personal advice – but here are some structures to consider if you’re currently heavily in 2025–2027 gilts.
4.1 Build a “short–medium” gilt ladder
Instead of:
All in 2025–2026 maturities
consider:
A ladder from 2026 out to 2032
Example (purely illustrative):
- 20% in 2026–27 gilts (e.g. TG26, T27A)
- 30% in 2028–29 (e.g. TE28, TG29)
- 30% in 2030–31 (T30, TG31)
- 20% in 2032–33 (TG32, TG33)
Effects:
- Your average YTM rises vs being stuck in 2026s.
- Each year, a rung matures and can be reinvested at then-current rates, keeping flexibility.
- You spread your exposure to interest-rate moves across the curve.
If you care about the tax profile, you can favour the low-coupon names in each bucket, which tend to trade at a discount and give you more return via capital uplift rather than income.
4.2 A “barbell” with cash and longer gilts
For some investors, comfortable structure = lots of instant-access cash plus a chunk of longer gilts.
Example concept:
- Keep, say, 50–70% of your “safe bucket” in cash / very short gilts (T-bills, 2026s).
- Put 30–50% into 2030–2035 gilts with higher YTMs (around 4–4.4% currently).
Why this can work:
- Cash covers short-term spending needs and emergencies.
- Longer gilts give a higher locked-in yield and potential capital gains if rates fall.
- You can fine-tune the split depending on your risk tolerance and time horizon.
4.3 Rolling out along the low-coupon curve (for tax-sensitive investors)
If you’re deliberately holding short-dated, low-coupon gilts for tax reasons, the question is:
“Do I just keep buying the next 1–2 year low-coupon gilt, or go out a bit further?”
The tax logic is:
- Coupons – taxed as interest (but can fit under your Personal Savings Allowance or within an ISA).
- Capital gains on gilts – CGT-exempt for individuals.
So many higher-rate taxpayers have focused on things like T26 and T26A: buy at a discount, receive tiny coupons, and collect a tax-free capital uplift at maturity.
The same logic can be extended out the curve:
- Low-coupon gilts such as TN28 (0.125% 2028), TG29 (0.5% 2029), TG31 (0.25% 2031), TG33 (0.875% 2033) all trade below par and offer YTMs in the 3.7–4.3% range.
- The coupons remain small, so your taxable income stays modest.
- The bulk of your return is again capital uplift back to £100, still CGT-free.
The trade-offs vs staying in ultra-shorts:
- You earn more, but accept more price volatility if you need to sell early.
- You delay when you get your capital back – which may or may not suit your personal plans.
If you’re close to retirement or have big known outgoings in the next 2–3 years, you might prefer to keep those specific years in very short gilts or cash, and only extend on money you’re confident you won’t need until, say, 2030+.
5. Practical checklist before you switch
If you’re thinking about moving from very short gilts to longer maturities, here’s a simple checklist:
- Match maturity to your time horizon
- Money needed in the next 1–2 years: keep it in cash / very short gilts.
- Longer-term “safe” money: more room to use 2028–2035 gilts.
- Compare after-tax returns vs savings accounts
- Work out after-tax interest on a savings account vs gilt YTM once you allow for the tax-free capital uplift.
- Remember your Personal Savings Allowance and ISA allowances.
- Use review the yields and current trading prices (dividenddata.com is a good source)
- Focus on the YTM column, not just running yield.
- For tax-aware strategies, filter for low coupons trading below £100 and check their YTMs and maturities.
- Be honest about your risk tolerance
- A 2032 gilt will swing more in price than a 2026 gilt when yields move.
- If seeing your bond portfolio down 5–10% on screen would worry you, keep your average maturity shorter.
- Remember this isn’t personalised advice
- Taxes and suitability depend on your overall income, allowances, and other holdings.
- If you’re making large moves or have complex circumstances, it’s worth getting regulated financial advice or tailored tax guidance.
0 Comments